VAT Explained Part 1 - Taxes made clear

Help for business understanding VAT

A guide for small business focussing on Travel and Fuel

VAT was introduced to the UK over 40 years ago on the 1st of April 1973. It was supposed to be straightforward and simple. Yet many years later, some of the rules can still leave you scratching your head – and they’re changing all the time.

For example, when it comes to employee travel expenses, did you know that there’s a difference between off-street and on-street parking when claiming VAT back? Equally, did you know if you hire a car for ten days you can claim back every penny of VAT, but keep the vehicle for an extra day and suddenly you can only claim back 50%?

VAT is here to stay

They say the two things you can be sure of in life, are death and taxes. Confusion around VAT is not going to disappear as more governments around the globe think of new and inventive ways of raising money – after all, VAT is the third largest source of revenue in the UK after income tax and National Insurance.

But it’s not meant to be tricky. In 2010, the Office for Tax Simplification was launched with the sole aim of making tax simpler and less confusing for the British people.

VAT Facts

Did you know that any purchase over £250 needs a full VAT invoice, not just a till receipt, to reclaim the VAT?

Are you aware that you can only claim back VAT on employee’s expenses (and not on someone else’s expenses who you have hosted but isn’t on your payroll)?

Did you know that you can only claim back VAT on gifts under the value of £50 per person in any 12-month rolling period? If you go over £50 you have to pay the VAT back on the lot!

Frequently Asked Questions

Q. Can I reclaim VAT on a taxi receipt?

A. As long as the company is VAT registered and you get a valid tax receipt, then yes. But the truth is, most taxi drivers are below the tax threshold and won’t be VAT registered.

Q. Is it true you can claim back VAT on up to £25 worth of expenses without a receipt?

A. It depends. That notion comes from an old, often misinterpreted piece of legislation which accounted for spend on coin operated machines like telephones and parking. Now that most expenses can be paid digitally, you should always have a receipt for any VAT you claim.

Q. How long do you need to keep VAT receipts for?

A. As a standard, you need to retain VAT receipts for seven years in the UK, and often longer in Europe (e.g. 10 years in Germany).

Q. Will HMRC penalise those who don’t keep receipts?

A. Yes, most probably. With expenses, you are reimbursing your employees for what they paid out, legitimately, for business. If you can’t prove they incurred those expenses then it appears you’re just giving them a tax free extra boost to their salary.

Q If an employee is travelling on the road for business, but goes via the office, can they claim the full journey?

A Typically travel between your home and normal place of business is not considered a “business” journey by HMRC. Therefore, the business element of the journey starts at the office, not home.

Reclaiming VAT on fuel

Fuel is one of the hardest areas to crack when it comes to reclaiming VAT on expenses. It can be unbelievably confusing to work out and terribly easy to exaggerate. It’s also one of the first things HMRC check.

Companies have the right to claim back VAT on the fuel element of mileage allowances paid to employees. But this must be supported by fuel VAT receipts which, in turn, must be dated on or before the date of travel.